• International Swaps and Derivatives Association, Inc.
December 6, 2005, New York

Introduction

Thank you. This is an exciting time to work in this industry. The derivatives markets
as a whole have grown -- not only in terms of the volume transacted but also in its
importance to the overall U.S. economy.

Since 1995, global futures and futures options volume has arisen more than six-fold.
Today, more than 6 billion contracts a year trade globally. We see a constant stream
of new products, markets, clearing arrangements, intermediary services and technology
not only in the United States but all over the world.

And over the years, we have seen that the derivatives markets -- whether on-exchange
or over-the-counter -- are inter-linked and complementary in many ways. Continued
success in the derivatives markets is now, in no small measure, dependent on the
integrity of the marketplace as a whole.

Your efforts are vital in this regard. Your work on a wide array of issues -- ranging
from developing master agreements to producing legal opinions on the legality of
netting and collateral arrangements -- promotes sound risk management practices and
fosters opportunities for financial innovation.

Today, I want to talk about what the CFTC, for its part, is doing to build and
protect market integrity: first, I will discuss how the CFTC oversees futures trading
through its market surveillance and enforcement programs; and second, how the CFTC
takes a proactive approach to fostering innovation and competition, especially as it
relates to the energy markets.

The Role of Market Oversight

First, market oversight: Under our authorizing legislation, the Commodity Exchange
Act (the Act), the CFTC’s mission is to foster competitive and financially
sound markets and to protect market users and the public from fraud, manipulation and
other abusive trading practices. In short, the CFTC’s primary role in the
futures markets is to protect market integrity.

At the most fundamental level, market integrity requires protecting the people who
rely on the proper functioning of the futures markets -- and today nearly everyone is
affected by activity in these markets, whether they choose to participate in them or
not. The price paid for goods across a range of industries -- heating oil being a
prominent one -- is determined, in large measure, in the futures markets.

That goal -- to put the interests of the public first -- is paramount. In the futures
industry, the flexible, principles-based regulatory framework of the Commodity
Futures Modernization Act (CFMA) places greater responsibility on the industry itself
for maintaining the public trust. The CFMA relies not on prescriptive regulations,
but on a commitment to ethics and professionalism that must be self-imposed and
vigilantly monitored by the industry itself. Having public trust and confidence in
turn guarantees that the futures markets will continue to flourish.

The self-policing mechanism takes on greater importance in markets that are not
subject to rigorous government regulations -- particularly in times of explosive
market growth such as that we have all experienced in the derivatives markets. It
requires the industry to continue to have a broad and long-term perspective on
business practices and appreciate that the way to ensure continued market success is
to protect its most vital asset -- public confidence.

Once lost, trust is difficult to regain. We have all learned this lesson from the
Enron scandal. And more recently, while we are far from writing the final chapter on
it, Refco is yet another reminder that reputation is fragile, and in building and
maintaining the public’s confidence, there is no substitute for sound ethical
judgment and strong risk management systems.

Vigilant market surveillance, backed by a muscular enforcement program, is the
cornerstone of the CFTC’s market oversight. Ultimately, the public must be
assured that the rules of the marketplaces are consistently and fairly enforced.

On each trading day, the CFTC staff monitors trading activity on the futures
exchanges to detect unusual activity or price aberrations that may indicate actual or
attempted manipulation.

The heart of the CFTC’s market surveillance program is the large-trader
reporting system. Through the large trader reporting system, the Agency closely
monitors the futures and option activity of all traders on the regulated exchanges
whose positions are large enough to potentially impact the orderly operation of a
market.

CFTC surveillance staff also monitors futures and cash market positions for unusual
movements in price relationships, which often provide early indications of a
potential problem.

The CFTC’s comprehensive market surveillance program allows the Agency to
combat manipulation not just after-the-fact, but also proactively by identifying and
mitigating potential price manipulation or other disruptions to the regulated futures
markets.

When problems are found, the CFTC does not hesitate to act resolutely. The
CFTC’s enforcement efforts have been critically important in the energy markets
-- as one cannot overstate the importance of a strong and visible deterrent to any
behavior that would hurt market participants and others who rely on futures prices as
accurate signals of market fundamentals.

While the CFTC does not comprehensively regulate the over-the-counter markets, the
CFTC has used its authority under the Act to investigate and prosecute false
reporting and manipulation occurring in those markets. This is a logical and vital
exercise of the CFTC’s enforcement powers -- since one can manipulate prices in
one market to influence prices and trading in another.

To date, the CFTC has been very aggressive in tracking down and prosecuting
misconducts in the energy markets. For example, the CFTC filed various enforcement
actions charging some 50 defendants with violations involving false reporting of
energy prices, manipulation, and attempted manipulative behavior in over-the-counter
markets that affected or tended to affect trading in energy markets. These
enforcement actions have thus far resulted in civil monetary penalties totaling
nearly $300 million.

Cooperative enforcement is critically important to the Agency’s success in
fighting market abuse. The CFTC recently signed a Memorandum of Understanding with
the Federal Energy Regulatory Commission. This MOU will improve the process by which
we exchange information concerning the energy markets and their participants -- and
enhance the CFTC’s efforts overall to protect the integrity of the futures
markets.

Competition

With effective market surveillance and vigorous enforcement programs, the CFTC and
the industry can assure that competition takes place on a fair, open, and level
playing field, and that competitive pressures do not put at risk market integrity or
investor protection.

This leads me to discuss competition -- and what we at the CFTC have been doing to
help foster a market environment that invites competition and innovation.

Since late 2000 when the CFMA was adopted, the number of new products traded on U.S.
exchanges has more than tripled. Eight new contract markets and nine new derivatives
clearing organizations have been approved by the CFTC, and 17 exempt markets have
filed notifications with the Commission. Electronic trading has soared from less than
10 percent of total volume of futures and options trading in 1998 to approximately 60
percent this year, and that percentage is increasing on a daily basis.

These changes in the futures markets reflect new competitive challenges, to be sure,
but also new growth opportunities. Product innovation and the increasing use of
technology offer the prospect of continued growth in the futures markets, in the form
of new trading venues, new trading strategies, new risk management tools, and new
customers.

For example, exchange-traded contract volumes are at all-time highs, notwithstanding
that the over-the-counter markets for financial derivatives also are thriving. Far
from being zero-sum competitors as many had feared, the OTC and exchange-traded
derivatives markets are serving as natural complements to one another.

In large measure, the landmark CFMA legislation, enacted over five years ago, has
provided a firm foundation for us to build on. In place of the traditional
one-size-fits all framework, the CFMA established a flexible principals-based
regulatory model -- which tailors regulations to fit the particular risk
characteristics of different trading platforms, products, and participants.

Exchanges can now choose to operate under one of several tiers of regulatory
oversight, depending on the products traded, the system in which they are traded, and
the sophistication of the market participants. At each tier of oversight,
prescriptive rules have been replaced by core principles governing operational
integrity.

In the energy markets, this multi-tiered system has spurred the growth of trading
through electronic trading facilities, known as exempt commercial markets.
Transactions conducted on these exempt commercial markets, though free from many
regulatory requirements, remain subject to the fraud and anti-manipulation provisions
of the Act.

The CFMA unbundled the clearing function from the trade execution function, and
granted the CFTC explicit authority over derivatives clearing organizations, which
are authorized to clear both on-exchange and over-the counter transactions.

The CFMA also provided a much-needed legal certainty for off-exchange activity. That
is, bilateral swap transactions between sophisticated counterparties -- involving
financial commodities that are not readily susceptible to manipulation -- are no
longer at risk of being found in court to be illegal off-exchange futures contracts.

Nowhere is the benefit of competition and innovation more evident than in the energy
markets. With the introduction of OTC clearing, the energy markets have seen an
explosive growth in the form of new trading venues, new trading strategies, new risk
management tools, and new customers.

Introduced in 2002, OTC clearing has taken off and has paved the way for greater
growth of the energy markets as a whole. In 2004 the New York Mercantile Exchange,
through its ClearPort facility, and the Intercontinental Exchange, through its
partner LCH.Clearnet, cleared more than 30 million OTC energy contracts. The 2005
figure is expected to be even higher.

OTC clearing mitigates counterparty credit risk by mutualizing risks at the
clearinghouse, and by facilitating offset and netting. It is a good example of
industry creativity stepping in to fill a gap – a need, in this case, exposed
by the collapse of Enron in late 2001. In the aftermath of the collapse, counterparty
credit risk became a formidable obstacle to conducting OTC transactions in the energy
sector. The OTC clearing -- with the help of the CFMA, which paved the way for the
clearinghouses to clear OTC products -- revitalized the OTC energy markets by adding
the necessary credit support.

Today, OTC clearing is still largely limited to the energy sector, but its success
could attract other OTC products. The CFTC looks forward to working with market
participants to explore additional opportunities in the clearing of OTC products,
while ensuring that credit and potential systemic risks are carefully and
appropriately addressed.

Conclusion

The developments in the energy markets serve to remind us that product innovation and
the increasing use of technology tend to deepen and broaden the market as a whole --
and as with all other free markets, competition and innovation will ensure continued
growth in the derivatives markets.

Looking ahead, the CFTC will continue to play an active role in promoting the highest
degree of market integrity.

But ultimately, maintaining market integrity is a task that falls upon all of us --
the regulators and the industry. It is a shared responsibility, which calls upon us
all to hold ourselves to the highest standards of ethics and professionalism. It is a
common mission that we must embrace with unwavering commitment and vigor.